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Today's Market View Including North River Resources and Coal of Africa

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Fed statement expected today – market waiting to hear comments on Fed tapering 

The market expects that the Fed will keep interest rates low but will scale back on QE.

Problem is that US mortgage rates work off the long bond.

The Fed may well be wedded to longer term QE to ensure effective interest rates are kept at low levels for a while longer.

UK BoE votes to keep interest rates at 0.5% and to maintain bond purchasing program

Metals prices pulled back this week on greater caution

Iron ore prices appear relatively stable at $117/t and are close to our expectations of $120/t for this year

Fitch published a report this week declaring that China’s Credit bubble is unprecedented in modern history and suggesting "the credit-driven growth model is clearly falling apart. This could feed into a massive over-capacity problem”.

Investors see Fitch and other ratings agencies as behind the curve and investors are positioned for China’s readjustment

China blew its economy 50 years ago on the overproduction of steel under the rule of Chairman Mao but this time China is running a far different economy.  The government talks of managing the transition to a more domestic led model away from the export led model which has fuelled so much economic growth and commodity consumption.

While the double digit growth numbers of the past decade may now be passed, China now has the potential to draw in a greater tonnage of higher value commodities to fuel its next phase of economic development.

Economic View

US - Fed Chairman Ben Bernanke will hold a press conference this afternoon which is expected to shed more light on plans of the central bank regarding its monetary policy.

Housing starts increased to a five-year high offering more evidence recovery in the sector is on track.

The gauge climbed 6.8%mom to 914k in May, compared to revised 856k and 950k forecast.

Building permits fell 3.1%mom to 974k in May, off the highest reading in more than 4 years in Apr. Estimates were for a 3.0%mom decline to 975k.

Consumer prices advanced 1.4%yoy last month, well below the Fed 2.0% target rate, offering some breathing space for Ben Bernanke to maintain monthly bond purchases at current pace.

CPI ex volatile food and energy components climbed 1.7%yoy in May, in line with expectations.

China  - Preliminary manufacturing PMI for Jun will be released tomorrow with forecasts for another below-50 reading indicating contraction in the sector.

Analysts estimates the gauge will come in at 49.1, down from 49.2 recorded in May.

Germany - Investor confidence climbed to 38.5 in Jun, up from 36.4 recorded in May and 38.1 forecast.

The Bundesbank said previously that the GDP growth rate should improve “markedly” this quarter, following a modest 0.1% increase in the three months through Mar.

Rising industrial production, improving exports and stronger business confidence measure by the Ifo institute signal recovery in the largest economy in the euro zone is gaining strength.

The central bank warned the growth rate might slow down in summer months and total only 0.3% for the year. The economy is forecast to grow by 1.5% in 2014.

UK - The latest BoE’s MPC minutes showed 3 members voted in favour of more monetary stimulus with 6 members to hold asset purchases at current levels.

Regarding the benchmark interest rate, all 9 members voted to hold the rate at current levels of 0.5%.

South Africa - The government will not introduce carbon tax on Jan 1 2015 if the levy and relevant legislation is not ready.

The draft legislation should be prepared by the end of the year or in early 2014.

The government proposes a rate of R120/t of carbon dioxide equivalent, raising at 10% per annum during the first phase, from 2015-2019.

Mozambique - Railway operations restarted yesterday following temporary suspension on the back of an attack on an arms depot in the Savane region the previous day.

Brazil - Around 200,000 people went on the streets of Brazil’s biggest cities amid rising public transport costs and high expenses of staging the 2014 World Cup.

Protesters criticized the state approved costs for hosting world football championship instead of spending raising spending on health, education and housing for poor. 

Political leaders have been accused of corruption.

In the capital, Brasilia, protesters breached security at the National Congress building and scaled its roof.

100,000 people wen on a demonstration in Rio de Janeiro.

Indonesia – 18,000 policemen were drafted in for riot control in Jakarta this week.

It makes us wonder if there is a link between the number of policemen and GDP per capita and if this might be used as a measure of national performance.

The UK employed a record 143,770 police in 2009 to control a population of 63.2m = 1 policeman per 440 of population which is close to the UN median of around 300 police officers per 100,000 inhabitants.

Curiously Indonesia only reports 243 police per 100,000 while China is surprisingly low at 182 policemen per 100,000.

US$1.3391/eur vs 1.3340/eur yesterday. Yen     95.08/$ vs 94.93/$. SAr 9.998/$ vs 10.039/$. $1.565/gbp vs 1.567/gbp

Commodity News

Precious:

Gold US$1,369/oz vs US$1,379/oz yesterday - Prices are range bound today ahead of the Fed press conference later today.

Physical demand for gold in North America and Europe has gone down by some 80% from “the April frenzy” as gold prices ranged lately according to Kitco Metals.

SPDR gold holdings continued to slide and declined to 1,002t (32,205koz) valued at US$44.002bn from 1,003t (32,253koz) yesterday.

Platinum US$1,440/oz vs US$1,430/oz yesterday

Anglo American Platinum said yesterday operations at Rustenburg and the northern Pilanesberg region restarted following a series of protests last week.

Palladium US$723/oz vs US$705/oz yesterday

Silver US$21.73/oz vs US$21.81/oz yesterday

Base metals:

Copper US$ 7,022/t vs US$7,060/t yesterday - Markets are waiting for the Fed’s announcements.

Chinese refined copper production climbed 18.4%yoy to 567,000t  In May, according to the National Bureau of Statistics.

Total production in the first five months of the year came in at 2.67mt, up 14.5%yoy.  This compares to some 3.7mt of refined metal consumed during the period.

Aluminium US$ 1,840/t vs US$1,844/t yesterday

Nickel US$ 14,147/t vs US$14,154/t yesterday

Zinc US$ 1,861/t vs US$1,856/t yesterday

Lead US$ 2,100/t vs US$2,095/t yesterday

Tin US$ 20,150/t vs US$20,315/t yesterday

Prices are forecast to increase to US$24,000/t in H2 of the year on the back of lower shipments for the largest exporter of the metal Indonesia, PT Timah said.

The government is set to raise the minimum grade for tin exports to 99.9% from 99.85% promoting local smelting and refining services. Ne purity standards should come into effect on Jul 1.

Shipments will then decline by 24% to 75,000t in FY2013.

Energy:

Oil US$106.2/bbl vs US$105.4/bbl yesterday

Natural Gas US$3.922/mmbtu vs US$3.900/mmbtu yesterday

Uranium US$39.90 (close 18/06/13) vs US$40.00 (close 17/06/13) 

Other:

Iron ore 62% Fe spot (cfr Tianjin) US$117.7/t (close 18/06/13) vs US$115.0/t (close 17/06/13)

Ferrochrome – prices look set to rise from low levels as stainless steel production recovers

Deals to sell back electricity to ESKOM expired on June 1st prompting ferrochrome producers to turn furnaces back on.

Also, South Africa is now looking to cut exports of chromite ore to help protect its own industry, a restriction which was first proposed a few years ago.

China raised ferrochrome production to above South African levels last year as uncertainty over South African supply prompted China to raise capacity to protect supply to its stainless steel producers.  

China is seen cutting open furnace production as pollution issues and energy costs rise.  

Any restriction in chrome ore supply and a rise in prices should hasten Chinese closures and may lead to a recovery in ferrochrome prices

Ferrochrome producers are suffering low price levels on cuts in stainless steel production.

Lower European demand and more significantly the short-term political interruption in new infrastructure projects in China which has served to slow the Chinese economy has caused producers to pull back production levels.  

The stainless steel industry tends to run on a two year cycle characterised by stop start production

Company News

Coal of Africa (LON:CZA) – DFS at Makhado 

Coal of Africa has published its DFS for a 12.6 Mtpa Run of Mine (ROM) operation targeting 2.3 Mtpa of hard coking coal and 3.2 Mtpa of thermal coal.

The Makhado project has a mineable in-situ tonnes of 344.8 Mt is projected to have a 16 year mine life.

Capex is expected to be US$406.3m with average gate cost of US$88.71/t including $39/t by product credit for thermal coal revenues.

The project has a pre-tax IRR of 30.1% with an NPV of US$697m based on a real discount rate of 8%.

The average price for hard coking coal assumed is $206.16/t.

The mine plan is expected to be divided into three pits where mining is expected to be staggered with mine build up requiring waste material to be pre-stripped in the initial box-cutting to provide an in pit coal inventory before coal extraction begins.

The strip ratio for the following 5 years is projected at 3.3 to 1 rising to 4.1:1.

The opex projections are based on a contractor based model.

The processing plant designed to optimise yields with all size fractions will have three sections – a double stage DMS plant for de-stoning and beneficiation, a fines circuit and an ultra fines circuit.

Initial assessments suggest a hard coking yield of 18.8% with 10% ash and a thermal coal yield of 25.8% at 30% ash.

The hard coking coal is expected to have a CSR value of above 60 and can be used as a primary coal in a hard coking coal blend.

The coking coal tested for higher levels of organic sulphur than some competing Australian products which could help in steel quality and lower emissions.

The coal will be classified as having high volatile matter.

Makhado’s thermal coal is expected to have a high calorific value and is within the specification of Eskom’s power station and for export.

The company intend to source water from the Nzhelele Dam subjected to getting a water licence.

Rail access will require construction of a 22 km spur and a rapid loading facility from an existing siding at Huntleigh which will connect to the domestic market as well as export through the Port of Maputo 700 km from mine site.

The company currently have a 3 Mtpa throughput allocation at TCM with an optional to subscribe for up to 100% (around 20 mtpa) of the port expansion.

All regulatory applications are expected to be received by H1 CY 2014.

Haohua Energy International Hong Kong hold 23.6% of the company and have injected $100m into the company so far.  

Conclusion: This expanded DFS sets out in more detail the prospects for this project. The targeted production is in line with expectations. 

The NPV looks respectable but we would argue for a higher discount rate for most projects with 10-12% more acceptable. The IRR of 30.1% looks attractive on a relatively conservative price assumption for hard coking coal. The assumption for thermal coal prices in by product credits is not published. 

Once permitting and funding is secured for this project, Makhado could be a game changer for the company.  The company will need strong shareholder support and project finance backing structured around offtake financing to make this work.  South Africa as always remains a bit of a wild card but we suspect Haohua Energy will continue to back the company for the hard coking coal element of the project.  The South African government is very supportive of Chinese involvement and finance into South Africa.  

North River Resources* (LON:NRRP) – Expansion of license area around Namib lead zinc mine

North River Resources has announced the expansion of its license area around the Namib lead zinc mine in Namibia.

The statement highlights renewed focus on expanding the reserve and resource at the mine and the potential for further resource discovery in the area.

The Namib mine has significant value within easy reach of its own infrastructure and could be brought back to production relatively quickly on its existing resource.

Expanding the license area to the South and South East of the mine license is designed to enable the team to explore the areas between the mine and the main road and beyond the water pipeline which feeds Rio Tinto’s Rossing uranium mine.

North River is to review the structural geology of the area and to run geochemistry and geophysical programs over the ground.  The idea is to see if the mineralisation seen at the Namib mine repeats in other areas of the new license.

Any discovery here could add significant value to the company.

The statement also reports the dropping of the Ubib license to which we attributed no value.  The company has also dissolved the Brandberg joint venture as exploration within the jv could not identify commercial quantities of mineralisation .

Conclusion:  North River is focusing its business on the expansion of the resource around the Namib lead zinc mine.  There is good potential for further discovery and for extension of the existing mine resource.  Exploration and drilling could eventually lead to the development of a larger scale mine plan that might be currently envisaged.

*SP Angel acts as broker to North River Resources


 

+SP Angel employees may have previously held, or currently hold, shares in the companies mentioned in this note.

 

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